If you do any amount of flying within the US, you’ve surely flown one of the regional airlines operating on behalf of a bigger carrier. When you board you might be greeted with a “welcome aboard this American Eagle flight operated by Skywest,” for example. American Eagle is the brand that American markets for their regional flights, while Skywest is the airline operating the flight.
Skywest doesn’t just operate for American, but also operates flights for Alaska, Delta, and United.
That brings me to the question that reader AL emailed me:
Why do airlines like United and Alaska outsource to third party airlines like Skywest for puddle jumpers? Why don’t they just create a separate entity to operate puddle jumpers themselves and take home all the cash?
It never made any sense to me.
What’s the benefit to airlines of using regional carriers?
The simple answer is that using regional airlines saves major airlines money compared to them operating a flight themselves. Where do the cost savings come from? For one, employees are paid significantly less.
Let’s look at pilots, for example. Per Airline Pilot Central, here’s the hourly payscale for American Airlines first officers:
Meanwhile here’s the hourly payscale for Skywest first officers, operating flights on behalf of American Eagle:
As you can see, pilots at American are making more than double as much, and in many cases even significantly more than that. Admittedly they’re flying bigger planes as well, but the whole idea behind pilots working for regional airlines is that they can build up experience so they can eventually get a job at one of the majors, which is why they’re willing to work for so much less.
So often regional jet pilots are doing it for the experience rather than the money.
For what it’s worth, Skywest is one of the best paying regional airlines. Take a look at the payscale for Mesa Airlines, and you’ll see that the pilots basically don’t make a living wage.
How do regional airlines make money?
It’s a pretty good business model for regional airlines. Typically regional airlines get paid a fixed cost for operating certain routes, and then all the risk lies with the major carrier they’re flying on behalf of. In some cases they’ll get incentive payments for operating on-time flights, not canceling flights, etc.
While I don’t believe it’s as common in the US, in some parts of the world the regional carriers get a percentage of the profits, so they’re taking on as much risk as the major airline is, if not more.
Why don’t they just own regional airlines and take home the profits?
Regional airlines (mostly) make money, so wouldn’t it make more sense for American to simply own their American Eagle planes and operate them, rather than letting another company make a profit off of them? The short answer is no, probably not.
The first reason is that it would likely eliminate the cost advantage. Most major carriers have negotiated with their unions that flights with fewer than “X” number of seats will be operated by regional airlines. You can bet that if the regional airlines became part of the major airline (even if a separate division), the major carriers’ unions would be fighting for significantly better pay for those crews.
Meanwhile at regional airlines, pilots and flight attendants are hired knowing full well what they’ll make and how the business model works, so that’s not as much of a concern.
Historically another reason the major carriers have contracted out to regional carriers is because it allows them to share some risk. Keep in mind that historically airlines are ridiculously unprofitable (though that has changed recently). So leased planes were almost a liability rather than an asset, given that they were losing money with just about each flight.
While regional airline contracts last for a certain amount of time, it does allow airlines to adjust demand over time to reflect the market conditions. If demand is way down, major airlines don’t have to renew their regional jet contracts. If demand is up, they can expand their contract, and get more planes quicker than they could on their own.
The use of regional airlines allows major airlines to cut corners with costs that they couldn’t cut if they were operating the same flights on their own. Furthermore, over time it allows major airlines to adjust their capacity, since regional jet contracts only last for so long. Typically regional airlines won’t be wildly profitable, but they also don’t have as much risk of being unprofitable as the major carriers.